Rethinking Penalty Clauses
T. A. DOWNES
The purpose of this paper is to reexamine the law relating to penalty clauses and related doctrines. The starting thesis is that a body of rules which was once radical in its approach is now out of step with the contemporary trends in the regulation of contractual clauses, that realignment of doctrine is not difficult to achieve, and that there are indications in recent decisions that the courts may be engaged in the task of modernising the law. It is now some twenty years since the Law Commission reexamined the law,1 and there are grounds to question its conclusion of the time that 'the application of the tests to distinguish between valid and invalid penalties . . . has, on the whole, worked satisfactorily.' Such questioning arises not so much from dissatisfaction with judicial decisions ostensibly based upon the present law but from doubts about whether in reaching these decisions the courts have truly adhered to the law as conventionally set out in the books. It is reinforced by the observation that civil law systems, while not disclaiming any power of control over penalty clauses, have operated from the presumption that such clauses should be given effect, as reflecting the will of the parties, and that any control must be seen as an exceptional measure. 2
It was suggested at the beginning that the approach to the regulation of penalty clauses was radical at the time of its adoption. The basis for this remark is the parallel with the regulation of exclusion and limitation clauses. As is well known, until very recent times in general exemption clauses could not be subject to substantive evaluation; control was limited to peripheral doctrines such as the incorporation of terms and the principles of interpretation. Such doctrines were sometimes strained to the limit____________________
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Publication information: Book title: Wrongs and Remedies in the Twenty-First Century. Contributors: Peter Birks - Editor. Publisher: Clarendon Press. Place of publication: Oxford. Publication year: 1996. Page number: 249.
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